Are You a Goals-Based Investor?

April 09, 2019

Ditch the Carrot and the Stick.

The first U.S. stock index was unveiled in 1896 by journalist Robert Dow and today it is widely known as the Dow Jones Industri­­­­al Average, or simply “The Dow.” Dow thought of his average as a measure of the stock market’s tide and a better way to understand its movements. With time, more and more indices were established, creating numerous ways not only for measuring movement, but for tracking investment performance. If we fast forward to today, indices and benchmarks are the standard for how we measure progress in our portfolios. However, what does winning or losing against a benchmark actually tell us?

When we measure our portfolio against a benchmark or index, we are using a relative performance measure; pinning our portfolio’s returns against the stock market or a benchmark made up of investments like ours. When we beat our benchmark, we tend to feel as though we have done something right. On the other hand, if we are losing to our benchmark, we tend to believe that we are behind and are missing out on performance that could have been captured.

A more fundamental way to judge your portfolio’s performance would be to first determine the investment goals, time horizon, and risk tolerance. How much money is needed to reach the goals? Over what period? What would happen if you were to lose some of it? Once the time horizon, savings, risk appetite, and liquidity needs are understood — basically once the goals have been determined — then the vehicles to get there can be selected and performance toward the goals can be evaluated. We call this goals-based investing.

Your portfolio should be established for something you want to spend money on, like retirement or something you want to buy; not some nebulous reason for just making money. For example, in 5 years, I would like to buy a 1985 racing red Ferrari Testarossa at a cost of $115,000. If I currently have $85,000 in my “Dream Car Brokerage Account,” this would require approximately a 6.23% average annual return net of taxes to reach my funding goal.

Of everything you read in the paragraph above, what stuck out to you? I bet for most it was the car. By identifying a tangible goal that means something to us, this will only increase the probability of successfully funding that goal because we put more “emotional stock” into something we can relate to versus some arbitrary number.

A goals-based approach not only paints a clearer picture of what type of investments we need, it sets the true benchmark for our portfolio and for us. If we can understand the performance needed, we can better measure progress and see if we are on track over time. As time goes on, we can more easily adjust as we keep the goal upfront, even if our situations, savings or investments change.

Instead of using your portfolio to just simply build money, take a more strategic approach to assembling investments in your portfolio. Goals-based investing creates a more realistic and accountable investment experience that will yield higher chances of successfully accomplishing your investment objectives.

If you would like to learn how we take a goals-based approach, please email me at